Philadelphia is Having Trouble with Flights and Complaints

Hub Telegram: PHILADELPHIA— THE decision of a record retailer to expand its distribution center in northeast Philadelphia rather than move to another city illustrates the mixed results of a tax policy this city uses to help it compete with suburban industrial parks.

Under the tax policy, adopted in 1985 to help stem the flight of companies and jobs out of the city, companies pay taxes only on the portion of sales or net income generated within the city limits.

“The business privilege tax is indifferent to whether a company is profitable, since it’s based on volume,” said William P. Hankowsky, president of the Philadelphia Industrial Development Corporation, a quasi-public agency.

While that policy has been a factor in retaining some business, it has not stopped all from moving elsewhere.

For Wee Three Record Shops Inc., the tax policy and other incentives adopted by the city have been a benefit. Because only one of its 63 stores is in Philadelphia, the company largely avoids paying city taxes. In addition, the company’s warehouse space in the city has a tax abatement that helps lower the net rent.

Such benefits were also a factor in the decision of Ikea, the Swedish home furnishings retailer, to lease 430,000 square feet in Philadelphia in the late 1980’s, but they did not stop Sears, Roebuck & Company from announcing last summer that it would move its retail distrbution center from Philadelphia to Wilkes-Barre, Pa.

The building used by Wee Three is in the Roosevelt Business Center in northeast Philadelphia, an industrial park on land purchased by the city’s development corporation to lure back manufacturing and warehouse companies that had left the city in the early 1980’s. Using tax abatements and subsidized property, city officials tried to offset the high taxes that drove companies away.

Mark Andreassi, president of Anvil Construction, which built the building occupied by Wee Three, said that in the past, the program of incentives and tax abatements helped city developers like himself compete with out-of-town sites.

He said that city land valued at $50,000 or $60,000 an acre could be bought at substantial discounts from face values because of Federal and city subsidies. Comparable suburban land had cost $100,000, he said.

“In their day, those subsidies programs were the only things going for you,” Mr. Andreassi said. “It was great for Philadelphia while it lasted.”

Such subsidies are no longer widely available, but the city still provides a five-year delay in assessing real estate taxes of $1 a square foot on newly occupied developments.

At Wee Three Records, Peter Bamford, the president, said the company remained in Philadelphia largely to retain employees who joined the company since its acquisition in 1989 by the W. H. Smith Group P.L.C., a British retailer. At the time it was acquired, Wee Three had 19 stores and an 11,000-square-foot warehouse in Philadelphia’s Manayunk section.

About a year after it was bought by Smith, Wee Three moved into 32,000 square feet of space in a Roosevelt Center building just completed by Anvil Construction. It has since expanded to take all of the building’s 52,000 square feet. Mr. Bamford would not discuss rent figures, but the property carries the five-year city real estate tax abatement.

Wee Three, which now operates stores under four names from Boston to Pittsburgh to Norfolk, Va., had considered many options in its move from Manayunk. Popular suburban sites like Lansdale, Pa., about 45 minutes northwest, had suitable access to Interstate 95, the Pennsylvania and New Jersey turnpikes and other major arteries, but few would have allowed the company to hold its 90-employee work force intact, Mr. Bamford said.

“We built up a team of people when we were in Manayunk who we wanted to remain with us,” he said. “After a year and a half in the business we didn’t want to rebuild. If we had put our distribution center in Lansdale, probably none of our employees would have traveled out there, so that wasn’t an option.”

While the city’s business incentives provide substantial initial benefits, they do not last forever, according to one of Wee Three’s neighbors in the Roosevelt Business Center that is nearing the end of its tax holiday.

Kenneth Shaw of Fred Hill & Son, a maker of materials-handling equipment, said that if he had to make the same decision again, he might have relocated his company outside Philadelphia. The end of Fred Hill’s five-year tax-free window next year will mean an eightfold increase in city taxes, Mr. Shaw said.